Powers was born in Evanston, Illinois, and his family later moved a few miles south to Lincolnwood, where his father was the principal at a local school. When Powers was 11, his family moved again, this time to Bangkok, Thailand, where his father had accepted a position at International School Bangkok. Powers attended the school through his freshman year, ending in 1972. In his time outside the United States, Powers developed a love of music, developing notable skill in vocal music as well as proficiency in cello, guitar, saxophone, and clarinet. He also became an avid reader, enjoying classics such as The Iliad and The Odyssey, but primarily works of non-fiction.

At age 16 Powers moved back to the U.S. and, following graduation in 1975 from DeKalb High School in DeKalb, Illinois, enrolled as a physics major at the University of Illinois at Urbana-Champaign. During his first semester, he switched his major to English literature. In 1978 he received his undergraduate degree. He continued his education at Illinois, and in 1980 received his MA in literature. He decided not to pursue a PhD in the field because of his aversion to strict specialization, which was also one of the reasons for his earlier transfer from physics to English; and the apparent absence of pleasure in the reading and writing done by graduate students and their professors (as portrayed in his novel Galatea 2.2).

After receiving his master's degree, Powers worked in Boston, Massachusetts, as a computer programmer. Seeing the 1914 photograph "Young Farmers" by August Sander, at the Museum of Fine Arts, inspired him to quit his job and spend the next two years writing his first novel, Three Farmers on Their Way to a Dance, which was published in 1985. The novel contains three alternating threads. The first is a fictional story about the three young men in the picture during World War I. The second is about Peter Mays, an editor for a technology magazine, who is obsessed with the photograph. The third is the author's own critical and historical musings, mostly concerned with the mechanics of photography and the life of Henry Ford.

Powers moved to the Netherlands, where he wrote Prisoner's Dilemma, a work that juxtaposes Disney and nuclear warfare. He followed this with what became his best-known work to date, The Gold Bug Variations, a story that ties together genetics, music, and computer science. Powers has said that he moved to the Netherlands to avoid the publicity and attention generated by his first novel.

Operation Wandering Soul, a finalist for the National Book Award for Fiction in 1993, is about a young doctor dealing with the ugly realities of a pediatrics ward. It was mostly written during a year's stay at the University of Cambridge, and completed when Powers returned to the University of Illinois in 1992 to take up a post as writer-in-residence.

Galatea 2.2 (1995) is a Pygmalion story, about an artificial intelligence experiment gone awry.

Gain (1998) is a look at the history of a 150-year-old chemical company, interwoven with the story of a woman living near one of its plants and succumbing to ovarian cancer. It won the James Fenimore Cooper Prize for Best Historical Fiction in 1999.

Plowing the Dark (2000) is another novel with parallel narratives, this time of a Seattle research team building a groundbreaking virtual reality, while at the same time an American teacher is held hostage in Beirut.

The Time of Our Singing (2003) is a story about the musician children of an interracial couple who met at Marian Anderson's legendary concert on the steps of the Lincoln Memorial in 1939. Powers displays his knowledge of music and physics in this exploration of race relations and the burdens of talent.

Powers's ninth novel, The Echo Maker (2006), won a National Book Award and was a finalist for the Pulitzer Prize for Fiction. The novel tells the story of a young man whose brain is injured in a truck accident. Although he largely recovers, he has cognitive impairments, including capgras syndrome, the suspicion that his sister has been replaced by an impostor. Another important character is a consulting neurologist, modeled on Oliver Sacks. The novel explores the themes of cognitive construction of reality, and the relationships between memory and emotional bonds between people, and some of the tensions between the beneficial and exploitative aspects of a famous doctor's work. The events occur along the Platte River in Nebraska, near the shrinking migratory refuge of the sandhill cranes. Social frictions in the story arise out of water and land use disputes.

Powers's latest novel, An Enhancement, was published on September 29, 2009. It features a writing instructor named Russell Stone, who encounters one of his students, Thassa, an Algerian woman who is constantly happy. Meanwhile, journalists and scientists hope to exploit Thassa's joyfulness for financial gain.

Powers was named a MacArthur Fellow in 1989. He received a Lannan Literary Award in 1999. He currently teaches a graduate course in multimedia authoring, as well as an undergraduate course on the mechanics of narrative, at the University of Illinois at Urbana-Champaign, where he is the Swanlund Professor of English.

Reviewer William Deresiewicz has written critically of Powers's oeuvre; in his review of The Echo Maker, published in The Nation, he writes of The Gold Bug Variations that "what's missing from the novel is, well, a novel. The characters are idealized, the love stories mawkish and clichéd, the emotions meant to ground the scientific speculations in lived experience announced rather than established. The thinnest of devices are introduced to allow Powers to suspend the plot for dozens of pages at a stretch." But Deresiewicz also noted that his "is hardly the standard view of Powers's work. Over the past two decades, Powers has established himself as one of our most praised as well as one of our most prolific writers of fiction."

In an admiring essay in The New York Review of Books, "In the Heart of the Heartland", published in December 2006, Canadian novelist Margaret Atwood praised The Echo Maker as "a grand novel...grand in its reach, grand in its themes, grand in its patterning. That it might sometimes stray over the line into the grandiose is perhaps unavoidable: Powers is not a painter of miniatures. Of the two extremes of American mannerist style, the minimalist or Shaker chair (Dickinson, Hemingway, Carver) and the maximalist or Gilded Age (Whitman, James, Jonathan Safran Foer), Powers inclines toward the latter. He gets his effects by repetition, by a Goldberg Variation—like elaboration of motifs, by cranking up the volume and pulling out all the stops.